Citron Research Attacks GSX Again
The NYSE-listed firm has gone through some really tough times during the past few months with multiple accusations.
During past months, GSX Techedu(NYSE:GSX) has been accused of defrauding investors by two short-sellers. On February 26, Grizzly Research, a research firm that produces differentiated research insights on publicly traded companies, released a 50-page report, ‘Why We Believe GSX Techedu is the Worst Publicly Traded Education Company.’ The firm really took a hit on April 14, after short-seller Citron said it's ‘the most blatant Chinese stock fraud since 2011.’
Following Citron's first report, as many as 16 US law firms initiated class actions to investigate the recently USD 10 billion valued Chinese education company, for exaggerating profitability. The survey focused on whether the company overstated indicators such as profitability, income, student enrollment, and teacher qualifications, or did not disclose information related to investors.
What’s worse, on May 7, Citron Research issued the third part of the report in Series of GSX Investigation. Citron presented to US regulators definitive evidence of GSX Techedu committing securities fraud using multiple undisclosed related party transactions to hide expenses/liabilities. The report also pointed out that it is highly unlikely that GSX claimed to acquire a customer at half the cost vs. peers. And over 80 highly suspicious WeChat official accounts engaging in customer acquisition solely for GSX that was not registered to any disclosed GSX entity. On Thursday, it was all going good for the NYSE-listed firm as it saw its stocks rise 4.82% to USD 40.87 but fell 1.37% soon after the short report was published.
The firm released its 2020 first-quarter financial report this Wednesday which showed that the firm managed to rack up a net income of CNY 1.298 billion, an increase of 336.6% year-on-year and an increase of 488% year-on-year of its core K12 business. It stated that the increase in total net income was mainly due to the increase in enrollment of paid K-12 courses. The number of registered users enrolled in paid courses increased by 307.4% over the same period last year, reaching 774,000.
"The report published by Citron is really bad. There is no substantial evidence and the so-called quantitative analysis is far from accurate," said Chen Xiangdong, the founder of GSX Techedu.
GSX was quick to respond to this latest report. The firm said that the WeChat official accounts mentioned in the report are the cooperators of GSX in market launch and promotion. These official accounts issued educational information, which aims to serve the students and expand the company's business. GSX emphasized that Wechat daily users are more than 1 billion, so Wechat is always one of the most effective promotion channels. The company has disclosed all related parties in the financial report. The number of regular course payers disclosed in the financial report is based on their payment time. In the fourth quarter of 2019, a large amount of the students chose to study in the first half of 2020. So there are nearly 1.2 million regular course students in spring plus the users enrolled in the first quarter of 2020.